Introduction
The supermarket industry in Australia has developed and has significantly impacted the country’s economy. Although several supermarket chains are on the market, Woolworths and Coles dominate. Recent changes in the global economy and global political processes have affected the industry, causing food prices to increase. Supermarkets use different strategies to address these challenges and attract customers. Therefore, this paper analyzes the current situation in the supermarket industry in Australia and evaluates the measures companies are taking to support sustainability.
Market Structure
The supermarket market in Australia is characterized by several large companies that have firmly established their positions in this industry. At the same time, the most significant in terms of the number of stores and popularity among buyers are Woolworths and Coles, which occupy 70% of the market (Van Kampen & Kirkham, 2020). Due to the small number of companies in this industry, big brands significantly impact the economy, pricing, and availability of goods to consumers.
Furthermore, since most of the industry is represented by two companies, entering the market is difficult. Woolworths and Coles already have extensive store networks, established supply chains, and established customers, making it difficult for new businesses to enter the market (Van Kampen & Kirkham, 2020). These two companies create high competition in the industry, which causes new companies to not make high profits. Moreover, such a market structure allows companies to receive stable profits even in inflation.
Food Price Rise
In 2022, there was significant food price inflation in Australia. According to Le (2023), “food prices at Woolworths and Coles increased at an average of 9.2% over the three months to December 2022” (para. 1). Prices increased the most for dairy and related products as well as bread and cereals.
This was influenced by several factors that led to the need for increased pricing for supermarkets. The rise in food prices began during the COVID-19 pandemic (Janda, 2023). It led to difficulties in the supply of products and an increase in the costs of enterprises for production.
Unfavorable weather conditions, which decreased the harvest, also influenced the rise in prices by the end of 2022. As a result of depleted food stocks, companies are forced to raise prices for these food categories to recoup their production costs (Janda, 2023). In addition, consumer demand is a significant factor influencing price formation. If demand is elastic, then an increase in the price of products will decrease consumer interest in these goods (Evans, 2023). At the same time, inelastic demand will increase company profits due to an increase in prices and stable sales of goods.
Dropped and Locked Program
Woolworths and Coles are pursuing different strategies to address rising food prices and attract more customers. One example of this method is the dropped and locked program, when companies lower product prices to gain a competitive advantage (Evans, 2023). Potentially, this approach has negative consequences for companies. If they cut prices simultaneously, neither company will gain a significant advantage in the market and may suffer financial losses.
Suppose only one of the supermarkets lowers prices. In that case, it can gain a competitive advantage and increase the number of customers. At the same time, the profit of the other business will decrease. A dropped and locked program can be successful enough to force competitors out of the market, but it also causes retaliation from another supermarket, which reduces profits for both enterprises.
Prisoner’s Dilemma
The dropped and locked program leads to a prisoner’s dilemma. When Coles lowers the price of goods, Woolworths is forced to do the same to not lose its customers (Evans, 2023). Under the Australian market structure, Woolworths and Coles could charge the same prices, making both companies profitable. However, the need for growth and increased market presence forces businesses to cut prices. As a result, both companies sell goods at unprofitably low prices, leading to financial losses for both.
Conclusion
The supermarket field in Australia is well-developed, but two companies, Woolworths and Coles, represent the bulk of the market. This makes it impossible for new firms to enter the market and creates many opportunities for Woolworths and Coles to influence the economy and consumer pricing. These companies use different strategies and approaches, such as dropped and locked programs. However, the nature of the supermarket industry in Australia poses some challenges for businesses and potentially results in a loss of profitability.
References
Evans, S. (2023). Food inflation at Woolworths, Coles jumps to 9.2pc. Financial Review. Web.
Janda, M. (2023). Supermarket prices surge and there’s more inflation to come, warn analysts. ABC. Web.
Le, K. (2023). Cost of living: Consumers and businesses feel the bite of surging supermarket prices. IBISWorld. Web.
Van Kampen, T., & Kirkham, R. (2020). Assessment of the Supermarkets and Grocery Stores Sector in Australia: A Case Study of Woolworths and Coles using DEA and VAIC™. The Journal of New Business Ideas & Trends, 18(1), 1-11. Web.